The reason for imposing an individual mandate on freedom-loving Americans was that Democrats want to transform the country into socialist hell. Ooops… that’s a secret we’re not supposed to share!

Let’s hypothesize instead that Congress and lobbyists for the insurance industry wanted to keep health insurance in the private sector, and that a mandate manages the problem of “free-riding” inherent to any system in which individuals or their employers buy their own coverage. For without a mandate imposed on those who can afford coverage, healthy people would have the option of waiting until they are sick to apply.

Seemed reasonable to Mitt Romney, when he engineered a mandate in the Massachusetts insurance system. And it was the lynchpin of the reform proposed by the influential, conservative (but not yet ultra-partisan) Heritage Foundation back in 1989. (Don’t try to find the smoking gun, though, on the Heritage website.) Ironically, candidate Obama opposed the mandate when he was trying to prove he was more centrist than Hillary Clinton. But he came around as president, in part because it was an easy fix to a hard problem, in part because the health insurance lobbies wanted it, in part because he thought conservatives would see it as an acceptable price to pay to keep the system private.

The rest, of course, is history. Republican strategists latched on to the mandate issue as a potential winner in a country in which everybody loves dessert and almost nobody is willing to eat their spinach first. Now, even if Obama and Congressional Democrats do well in the election and block any changes to the law, a very-well-insured majority on the Supreme Court might just decide that the mandate is unconstitutional.

So, what are the alternatives? One is muddling through: The (less) Affordable Care Act would remain the law of the land even if the mandate tanked, and Democrats certainly wouldn’t help to repeal it. Premiums would go up faster than otherwise. But at least more Americans would be spared financial ruin from catastrophic illness.

The other alternative is to amend the law to discourage free-riding in a way that passes muster with the Supremes — say, by charging a financial penalty to those who enter the system after an initial enrollment period. This, by the way, is how it’s done with the Medicare drug benefit engineered by the Bush Administration.

Of course, the Republicans could win big in the election and use their clout (mandate?) to repeal the health care law. Then it would be business-as-usual; the system would presumably limp along until the politics of spotty coverage and unchecked health care inflation seemed less attractive than the specter of Big Brother.

We can’t resist adding a last irony to this poisonous political brew, though. As Paul Starr points out in The New Republic, a Supreme Court decision barring the individual mandate would also apply to any future Republican initiative to privatize Medicare. Good luck with that, guys.

(This post was also published on Forbes.com.)

The AT&T deal drew the wrath of both the Justice Department and the FCC, which ultimately proved fatal. Does a similar fate await Verizon?

Ah, you say – there’s no real comparison. Unlike the proposed AT&T/T-Mobile merger, Verizon’s acquisition doesn’t involve the acquisition of millions of subscribers from a competitor, increasing market concentration in the wireless market.

But the deals do have one big thing in common: In both, the primary objective was to cope with the looming scarcity of spectrum. For without more bandwidth, neither carrier will be able to deliver on the promise of whiz-bang wireless broadband services such as high definition movies anytime, anywhere.

To be sure, the problem here is not precisely a shortage of spectrum per se, but a shortage created by the wasteful allocation of spectrum today. If Washington were so inclined, it could free up a ton of spectrum for more valuable uses. That includes spectrum now warehoused by government for low-value tasks and spectrum assigned to commercial interests – notably local TV stations – that no longer make much use of it. The process would be pretty simple: auction the spectrum to the highest bidders (perhaps with a share of the proceeds going to legacy holders), and then allow it to be traded like any other valued resource.

This is an old, but important, idea, one first suggested by Nobel economics laureate Ronald Coase back in 1959. And it’s one that has taken on greater urgency in recent years, both because the technology of spectrum-hungry broadband mobile has arrived in the form of tablets and smartphones, and because Washington desperately needs revenue. (We’re talking tens of billions here.) But the politics of spectrum allocation remain gridlocked, as competing interests push and shove for advantage.

So AT&T and Verizon, the number one and two players in the American wireless market, resorted to end-runs around the problem – that is, to buying spectrum from other carriers or merging to make more efficient use of the partners’ combined holdings. If the AT&T/T-Mobile combination had survived the legal gauntlet, it could have become the largest U.S. wireless provider, with as much as one-third of the market. But the emphasis here is on the word “theory.” The merger might or might not have reversed T-Mobile’s sinking fortunes – which is why its parent company, Deutsche Telekom, has signaled its intent to leave the U.S. market, with or without a merger deal.

The upshot is that it’s far from self-evident that AT&T would have remained first in subscribers for long in a post-merger market. Verizon’s rollout of 4G, the holy grail of mobile excellence, is expected to cover more than 200 million Americans by the end of this year — compared with roughly 70 million for AT&T. Moreover, the proposed Verizon deal includes cross-marketing with the cable companies’ retail stores, yet another advantage in this most visible of consumer markets.

But the merger succumbed to implacable opposition from the trustbusters at Justice and the micromanagers at the FCC. Both agencies argued that the merger would give AT&T more latitude to raise prices. And neither apparently put much weight on AT&T’s need for additional spectrum if it is to offer viable competition for Verizon in a 4G world.

If this were 1951 instead of 2011, a time when self-satisfied American mega-companies like GM set the pace for global industrial innovation, we’d have more sympathy for the government’s tilt against market concentration. But as the Verizon gambit makes clear, this is anything but a static contest. AT&T and Verizon are living in uncertain times in which they must run to stay in place. That doesn’t mean the risk of monopoly power is as dead as the Oldsmobile. But it does mean that discretion in managing markets really has become the better part of valor.

As we see it, Washing has three options. The first is to drastically limit what firms like Verizon and AT&T can do to improve their service offerings, with obvious short-term consequences in terms of slowing the roll out of 4G. The second is to break through interest-group gridlock and leaven competition in the wireless market with a lot more spectrum – the best option, surely, but probably a political non-starter at the moment. The third option, and the probably the best under the circs, is to look favorably upon telecom deals that promise more efficient use of currently available spectrum on the premise that the vitality of innovation means more to consumers than the potential downside of greater market concentration.

Does that mean giving free passes to the telecom giants? Hardly. But it would mean a change in priorities at Justice and the FCC in which the agencies used their legal leverage to minimize concentration in regional wireless market without undermining the potential for more efficient use of spectrum.

America is, of necessity, crisscrossed with pipelines that move crude and refined liquids from well to refinery to market. And for the most part, their construction hasn’t made waves because oil is relatively safe (far safer than natural gas) to transport. What really sets apart the proposed pipeline expansion, which would add a link between Canada and Gulf Coast refineries, is the source of the crude.

Canada is rapidly expanding production of oil from “tar sands,” which is available in great quantity in Alberta. There’s no free lunch here: the extraction process uses a lot of energy, thereby generating more carbon emissions than extraction from conventional oil fields. But Canada, which (unlike the United States) has a climate change policy in place, decided that the benefits exceed the societal costs. The closest market for the additional oil is to the south; hence the proposed pipeline expansion.

U.S. environmental groups, which failed to stop tar sands development, have redirected their efforts to blocking the lowest-cost way of moving the oil around. And with that in mind, they made common cause with residents of Nebraska who don’t want to be bothered with a pipeline. The White House, for its part, is eager to avoid further conflict with enviros, who are already alienated by its tepid support for climate change legislation and reluctance to toughen air quality standards. It’s not surprising, then, that the administration decided to take the path of least political resistance, putting the project on hold until the 2012 election is history.

This is being heralded as a great victory for environmentalists. It’s not clear what they’ve accomplished, though, apart from the psychological and financial lift of beating the pipeline lobbyists. The alleged risks to groundwater in Nebraska, now averted, were minimal. Moreover, Canada is almost certainly going to develop the tar sands anyway, if necessary spending a bit more to ship the product across the Pacific to energy-hungry Asia. Remember, too, that Americans aren’t going to conserve oil just because supplies from Canada are restricted. What doesn’t get pumped across the American Great Plains to refineries in the American south will thus be replaced by imports arriving on supertankers from Africa and South America – a far riskier way to move oil as well as one that increases CO2 emissions.

The broader message here is that, with a federal government badly weakened by partisanship and a public ever less inclined to defer to planners in Washington, the chances of productive compromises on controversial environmental issues is approaching zero. And that will leave all sorts of changes that many environmentalists really want – everything from the expansion of wind power to mandated increases in energy efficiency to a sensible solution to nuclear waste storage – in limbo. Not a message most of us want to hear.

(This post was also published on Forbes.com.)

Don’t be stupid. In return for putting up with the hassles of New York traffic and the risks of being robbed — not to mention the occasional drunk who leaves his partially digested dinner on the back seat — a driver can expect to net a measly $15 an hour. That explains why the vast majority are young immigrants lacking marketable skills (and, often, command of the English language). But it certainly doesn’t explain why one fortunate investor recently found a buyer willing to pay $1,000,000 for a New York City taxi “medallion,” the little aluminum plate screwed onto taxi hoods that gives the owner the right to operate a single yellow cab in Gotham.

We don’t know if a taxi medallion is actually worth a million bucks. But we do know that the six-figure transaction is an eye-catching consequence of what economists call “regulatory capture,” in which the regulated gain control over their regulators – in this case, City Hall.

There are some good reasons to regulate taxis. When you flag one down, you’d like to be sure that the driver has a license, the vehicle is insured and the meter ticks along at the advertised rate. But in New York (and, to be fair, most other cities), the regulators’ first loyalty is to the interests that butter their bread. So, while New York’s Taxi and Limousine Commission does pay attention to safety and does work at discouraging fraud, its primary task is the care and feeding of the investors in the taxi cartel.

When the Great Depression hit New York and the city’s 30,000 taxi owners couldn’t pay their bills, the city’s impulse was not unlike that of the Roosevelt Administration in Washington: limit supply, so that demand would be adequate to support the suppliers left standing. FDR’s plans were (thankfully) declared unconstitutional, but New York City’s taxi cartel was there to stay. To operate a yellow cab and solicit passengers on the street you need a medallion. And the number of medallions is fixed at 13,237 – roughly 3,000 fewer than in the year (1937) the system was created.

A minority of medallion taxis must be owner-operated, but the owners are free to lease them to others when they aren’t behind the wheel. The rest are “corporate” medallions, which give the owners – any investor is welcome — the right to attach them to cabs and lease them to the highest bidders.

The taxi commission sets fares according to criteria vaguely related to operating costs, and taxi owners are perennially happy to explain that they are too low. But one fact proves the owners have it all wrong: investors are willing to pay a lot of money for the privilege of joining the government-enforced cartel.

As a thought experiment, let’s say the expected return on a $1 million medallion is seven percent annually (a low figure in light of the risks). To meet expectations, fare would have to be high enough to yield about $200 a day in profits. Yes, that’s right: $200 a day, after netting out the cost of drivers, fuel, maintenance and vehicle depreciation!

Of course, it’s hard to say what the “right” regulated fare would be because we don’t know what the “right” number of taxis is. In a competitive market, the quantity and the price would be set simultaneously by the invisible hand. Such an auction market wouldn’t work very well in New York, since patrons – many of whom are strangers to the city – would have to negotiate fares each time they flagged down a taxi. But one could imagine switching to a system like the one in Washington DC, where fares are regulated, but anyone who meets minimum service criteria can go into the taxi business.

Don’t hold your breath. If corporate medallions are worth $1 million each, the whole lot of them is worth something north of $10 billion (owner-operated medallions are presumably worth less than $1 million). And the owners are hardly likely to give up this unearned, government-defended surplus without a struggle. In any event, there’s no one around willing to give them a fight.

The wholesale cartelization of American industry didn’t survive in the 1930s, but arguably, only because the unelected geezers on the Supreme Court didn’t give a toss what the powerful business interests who favored the National Recovery Act thought of them. All too often, though, the wheels of regulation grind in only one direction.

Heard about Viber yet? It’s an app for the iPhone and for Android smartphones, the neatest means yet for making virtually free phone calls and sending free text messages to anyone, anywhere, anytime. Oh, and did we mention that the voice quality is typically superior to that of the mobile phone networks? The only catch is that both parties need to install the software.

Well, not quite the only catch. If Viber and similar mobile phone applications from Skype and others are widely adopted – and we can’t imagine why they wouldn’t be – their use will significantly erode the revenues of the wireless telecom networks. This would bring into sharp focus an issue that neither the telecoms nor their regulators are eager to confront: Should the carriers be allowed to decide which applications can be used on their systems, and on what terms?

Viber is not a technological breakthrough. Dozens of companies offer ways to take advantage of the somewhat arbitrary distinction between voice and data communications built into the wireless carriers’ price plans. But Viber is the slickest, most seamless way to date to use so-called voice over Internet protocol technology on popular smartphones.

So what’s the problem here? Thanks to pricing structures going back to a time when the only wireless application that really mattered was voice communications, the voice “tail” still wags the data “dog.” Voice and text messaging use a small and rapidly diminishing share of wireless bandwidth, but generate much of the wireless telecoms’ revenues.

That is likely to force wireless telecoms to change the way they price services. They could switch to plans in which smartphone users were simply charged for their use of the networks, however they chose to use them. Indeed, since voice and text use so little network capacity compared to, say, video streaming, one could imagine plans that threw in unlimited voice minutes as a “free” bonus. Alternatively, they could maintain the voice-data distinction, charging fees for access to Viber-like voice applications – or simply bar access to services that competed directly with their own.

Now, from an economist’s perspective, there’s nothing wrong with charging according to use – especially since the FCC has muscled the big wireless carriers to provide advance notification when customers’ usage exceeds their plan limits. The second approach, controlling access to applications, is more problematic.

We all think it’s OK for a movie theatre to bar patrons from bringing their own popcorn. Isn’t that the same as a wireless carrier barring use of a competing service on its network?

Maybe. In a competitive market, wireless customers who don’t like the restrictions imposed by one telecom are able to shop for another more to their tastes. (Right now, for example, T-Mobile and a number of regional carriers are trawling for business by offering flat-fee unlimited data plans.) If there isn’t much competition, though, it’s the job of the antitrust agencies and the FCC to prevent the carriers from protecting their own services at the expense of competitors by assuring that Viber and its ilk can be used on the networks on reasonable terms.

We think the wireless carriers deserve the benefit of the doubt (at least in markets with several carriers), because there is evidence of robust competition specifically aimed at enticing the tens of millions of Americans who still use plain-vanilla cellphones to step up to broadband Internet access.

But everybody needs to remember there’s no free lunch here – that, one way or another, the telecoms need to cover the costs of subsidizing smartphones and expanding their wireless networks to meet the exploding demand for bandwidth. And that’s probably going to mean bigger bills (along with bigger benefits) for customers who dive into the astonishing world of high speed wireless.

(This post was also published on Forbes.com.)

This Whac-a-Mole model of pricing may not explain everything about how banks have responded. But there’s more than a little truth to it because banks operate in “two-sided” markets in which services sold to some (debt card users) are inextricably tied to services sold to an entirely different group (retailers). And while competition among banks probably limits the sum of the two charges to the overall cost of facilitating debit card transactions, economics offers no particular reason why the charges should be divided among the parties according to the separate cost they exact on the system.

Indeed, two-sided markets lead to widely varying divisions of fees. “Free” TV exacts 100 percent of the cost from advertisers and nothing from TV watchers. Microsoft, by contrast, charges application developers nothing to piggyback on the Windows PC operating system, getting all its Windows revenue from consumers. Apple and Google split the baby, charging 30 percent of the price of smartphone apps to developers and the rest to consumers.

But back to banks. Big retailers have been howling for years about the unfair division of transactions fees – usually 100 percent of the total fees — that they paid banks each time a debit card was used. And they managed to shoehorn in an amendment in the financial reform bill that directed the Fed to limit those fees to the cost of providing the service on the merchants’ side of the market. The ceiling was set at about 24 cents per transaction – more than merchants wanted, but just a bit more than half of what banks were averaging until the September 1 deadline.

Not surprisingly, then, banks are looking to the other side of the debit card services market to recoup revenues lost on the merchant side. Hence the decision by the big banks (with the conspicuous exception of Citibank) to charge a flat $3-5 per month for the privilege of using a debit card. They’re hoping/expecting that account holders will moan and whine awhile, then think no more about it. Small banks and credit unions, which are not covered by the ceiling and don’t seem to be planning to charge account holders, will presumably do their best not to let card users forget.

As a general principle, we think any limitation on how banks generate revenue in a competitive market is bad policy as long as the fees are adequately disclosed. And we think price regulation is especially unfortunate where a two-sided market is functioning.

This is not based on affection for all those nice folks in the banking business. There could be very tangible costs to society as a whole in fixing debit card prices. Debit cards, don’t forget, are the edge of the wedge in the transition from paper-based banking to far more efficient electronic banking. And shuffling fees in a way that inhibits the use of debit cards is certainly a step in the wrong direction, if the goal is to wean consumers from writing checks for small sums.

War, we all know, is too important to be left to the generals. By the same token, two-sided markets are too complicated to be left to lobbyists and regulators.

(This post was also published on Forbes.com.)

So what’s changed? Have politicians stopped listening to farm lobbyists?

Hardly. Most of the decline in support is a consequence of rising commodity prices. In OECD countries, the portion of farm revenue that comes out of government coffers is generally linked to crop prices – when consumers pay more, governments pay less. And the recent boom in commodity prices, driven by rapid growth in demand from China (along with the diversion of corn and sugar into to alcohol production), largely explains why total support fell from 37 percent of farm income in 1986 to 18 percent in 2010.

But changes are afoot, and from a surprising place. The European Union’s Common Agricultural Policy, once infamous for such feats as stockpiling a “butter mountain” and a “wine lake,” not to mention the dumping of vast quantities of high-cost sugar on world markets, really has improved. At 22 percent of total revenues, EU support of agriculture is above the OECD average (and is still way above the United States’ 9 percent). But it is no longer competing for the badge of shame with the likes of Japan (49 percent), Korea (47 percent) and Norway (60 percent).

Equally important, the EU has shifted much of its support from production- and trade-distorting mechanisms (remember the butter mountain…) to a combination of cash for farmers for not growing crops and incentive payments for a variety of largely benign activities. The latter includes everything from encouraging preservation of erosion-vulnerable land to promoting rural economic diversification (think tourism) to more humane treatment of farm animals. All told, production-distorting aid (the sort keyed to crop and agricultural input prices) fell from about two-thirds of the total to less than one-third.

Of course, no contemporary feel-good story is complete without a hint of bad news to come. Here, it’s the reality that a handful of big emerging market countries seem tempted to make the same mistakes on agricultural policy that trapped the rich countries in the 1980s. Russia is upping  farm subsidies (at least until oil prices tumble again). More important, China is raising farm supports, albeit from a low level.

Beijing’s motives are understandable:  hundreds of millions of rural residents, who in recent decades have been subsisting on leftovers from the Chinese economic miracle, must somehow be pacified. But the inclination to subsidize inputs (in particular, fertilizer) could prove to be a bad habit that is very tough to break. As Santayana said… you get the picture.

(This post was also published on Forbes.com.)

The Department of Justice has come out with guns blazing in an effort to stop the $39 billion AT&T/T-Mobile USA merger. But is it really in the interest of either the antitrust bureaucracy—or the consumers they are supposed to represent—to put the kibosh on this one?

There’s a legitimate dispute here. On one side are folks (like us) who believe that the merger’s likely benefits—faster introduction of new technology to meet the exploding demand for mobile broadband—far exceed the risks associated with greater market concentration. On the other side are those who believe that moving from four big national carriers to three would mean the end of serious price competition in the wireless industry.

Before engaging in a full-blown legal battle, we think it would serve the interests of the Justice Department to see if its concerns could be met without a trial. For one thing, there’s a real possibility that the trustbusters could lose —the judge in the case has shown in the past that she is no rubber stamp for the government. For another, a trial means that both company’s plans will be put on hold, a prospect that could prove costly to consumers, workers and the telecoms.

T-Mobile USA is running just to stay in place. It lost almost a half-million contract customers in the first quarter of 2011. And though it managed to replace most of them, the bulk of the newcomers were less lucrative subscribers recruited though resellers. Moreover, T-Mobile’s corporate parent, Deutsche Telekom, isn’t about to bankroll a rescue. The German communications giant has made it plain that it won’t invest more to sustain its American presence. Indeed, by the time a trial is over, a much-weakened T-Mobile may simply be unviable as a standalone entity.

Does AT&T have anything to give to satisfy the government? AT&T’s CEO Randall Stephenson is on record that the company is prepared to divest some assets, reducing its share of the business in some markets. That ought to open the door for a deal. The top 25 local wireless markets, served by all the major carriers along with smaller wireless companies eager to buy market share with low prices, are already so competitive that the merger would have little material effect. But divestitures in smaller markets ought to go a long way toward assuaging genuine concerns about market concentration.

We think serious settlement discussions are the way to go. Duking it out in court could lead to a winner-take-all outcome in which the only certain loser is the public.

Let’s get a few talking points out of the way. Yes, the Supreme Court let online retailers off the hook in 1992, concluding (almost without dissent) that states had no legal claim against them unless they maintained facilities within their territories. Seems enforcement was unconstitutional because it violated the Commerce Clause.

But that doesn’t mean it is good public policy to insist that on-the-ground retailers collect state “use” taxes from customers while giving a free pass to the ones out in cyberspace. Indeed, the only rationale for letting Amazon do its own thing that has any popular traction is the one you’re likely to hear only at Tea Party rallies: the only good tax is a dead tax.

Economists, for their part, aren’t big fans of sales taxes because they’re generally regressive and always distort the allocation of resources. But you won’t find much support for Amazon in this special case, where some retailers are taxed and some are not, and the customers who escape the levies are often more affluent than those who don’t.

Nor does the court decision necessarily mean the states are powerless if (as in the case of Amazon) the out-of-state cyber-retailers use in-state “affiliates” to steer business back to them. When New York insisted that Amazon serve as tax collector in 2008, the company acceded but embarked on the long and winding road toward an appeal to the Supreme Court. Kansas, Kentucky, North Dakota and Washington followed suit. But as revenue-starved states piled on, Amazon changed tactics. In response to parallel laws, it dumped thousands of affiliates in Rhode Island, North Carolina and Illinois. And it is challenging the constitutionality of Colorado’s new law requiring that the company squeal on anybody in that state who makes purchases on Amazon.

In California, though, the battle has gotten really interesting. In June, the state adopted a version of the law used elsewhere. Amazon fought back with threats to drop its 11,000 affiliates in the state and — more striking — rolled out a ballot initiative (backed with a $5 million marketing campaign) to give California voters the last word on the subject. The initiative was sheer genius: Californians have a long tradition of just saying no to taxes whenever they’re asked, and Democratic legislators (who favor the law) don’t want to be caught on the same ballot.

From this perspective, then, it seems a bit odd that Amazon decided to cut a temporary deal with the Golden State. In return for the state’s agreement to delay the tax for a year, Amazon dropped the ballot initiative. After that, it’s anyone’s guess what will happen. One possibility: Amazon could clean house, removing every vestige of its marketing and distribution infrastructure from the state.

The only neat solution to the problem is federal legislation that constructs a detour around the constitutionality issue. Richard Durbin (D IL) has introduced just such a bill. It would give states the right to force tax collections if they agree to join the Streamlined Sales and Use Tax Agreement – a model sales tax code that sharply reduces merchants’ hassle in trying to figure out what is taxed where, and at what rates.

Here’s a surprise: Amazon claims to support the Durbin bill. Cynics say that Amazon is only behind the law because the company is counting on Tea Party loyalists to smother it. The ball, in the end, will probably end up in the court of the House Republicans. Then we’ll find out whether they’re willing to favor retailers in cyberspace over the ones that employ folks in their own districts.

(This post was also published on Forbes.com.)

(This post was also published on Forbes.com.)